Chinese white-box tablet makers seem to be in trouble, as their margins are melting away.

According to China’s National Business Daily, average gross margins for 2014 were below 5%. As a result, as many as 30% of them have already left the market to focus on alternative products. These alternative products include various accessories, mobile power supplies and dashcams.

Others are trying to market new tablets for different niches, such as dual OS tablets with Windows 8.1 and Android. Cheap Bay Trail parts make such tablets possible, but Intel’s contra-revenue programme won’t last forever, so this niche could be in trouble too.

The average white-box tablet sells for less than $50. While this may sound cheap, it should be noted that prices of entry level brand name tablets also tumbled last year and the difference is simply not that big anymore.

Demand for white-box tablets peaked in late 2013, accounting for about 25% of the overall tablet market in 2013. However, the trend appears to be reversing fast.

Intel and MediaTek don’t have much in common, but it appears that they are locking horns in China, in the white-box tablet business of all places. Both companies are vying for a slice of the booming white-box tablet space, which are starting to resemble vanilla PCs of the eighties.

However, that’s where the similarities end. The companies are going about it in a much different way, their processors aren’t what we would call similar, but there is still plenty of overlap.

Intel contra revenue vs. MediaTek organic growth

Intel’s only hope of getting into the cutthroat white-box space is through generous deals offered to vendors who choose Intel parts over the competition. The strategy is working, but at the same time it is also costing Intel a lot of cash. Analysts believe Intel could burn as much as $1bn on tablet subsidies this year, although the chipmaker really doesn’t like it when people use the dirty S-word.

MediaTek is taking a different approach. It is rolling out a number of value chips, ranging from quad- and octa-core Cortex A7 parts to mid-range and even performance parts based on A12, A15 and A17 cores, including big.LITTLE designs.

It appears that both strategies are working. Digitimes reports Intel and MediaTek are getting a lot of love from Chinese tablet makers. MediaTek has competitive products and it brings 3G and 4G support to the table. Intel’s subsidies are also doing the trick – and luckily Intel has some good tablet parts to offer, which wasn’t the case in the past.

Intel’s Atom Z2520 and Z3735G appear to be the main weapon in the chipmaker’s push behind the Bamboo Curtain. A 7-inch Intel tablet can leave the factory for as little as $50, while a MediaTek 3G-enabled white box tablet has an ex-factory price of $39.9. Demand for Intel and MediaTek solutions is going up, according to industry sources.

What about the competition?

Chinese white-box outfits tended to use Rockchip and Allwinner parts, along with chips from Amlogic and smaller chip designers. The companies are fighting back, but they don’t appear to be having much success.

Rockchip recently rolled out a new quad-core SoC, Allwinner has the octa-core A80, while Amlogic is talking up its M802, with UHD/4K support – not that it’s very relevant for white-box tablets.

What about the big players? Samsung is not interested nor does it have any SoCs that would fit the bill for white-box tablets. Nvidia is focusing on high-end SoCs with powerful graphics, overkill for cheap tablets. Qualcomm, the elephant in the room, is going after smartphones, with affordable 4G-enabled parts.

AMD’s Temash parts are out of the running, too. They will soon be replaced by Mullins APUs, but AMD does not want to pursue the low-end tablet market. During the company’s latest conference call CEO Rory Read criticised Intel’s contra revenue approach, saying that it’s “foreign” to AMD. Of course, AMD knows a thing or two about Intel subsidies and it simply does not want to go toe to toe with Intel, not when there’s no level playing field.

Intel started talking about $99 tablets last year and some analysts were baffled by the company’s decision to join the SoC race to the bottom. Why bother with a high-volume, low-margin market that can only be conquered with quarterly subsidies in the hundreds of millions dollars? It still looks like a strange market for Intel to compete in, but the sheer amount of money and effort involved in the company's tablet push indicates that this was a strategic decision rather than a sideshow designed to appease investors and analysts.

Intel knows what it’s doing. It’s waging a proxy war against the ARM alliance and it’s picking its fights wisely. Going after a potentially huge virgin market controlled by relatively small players should be easy, Intel could have gotten away with it almost uncontested had it not been for MediaTek. However, going after white-box tablets is still a lot easier than trying to enter the incredibly competitive smartphone SoC business, especially now that Apple, Samsung and LG are developing in-house SoC designs.

For Intel, Chinese white-box tablets are a back door, the easiest way to boost market share and enter this segment without taking on the biggest players.

Shipments of Chinese white-box tablets reached an estimated 25 million units in Q3, up 40.4 percent from a year ago.

According to Digitimes Research, as much as 80 percent of total volume was shipped overseas. White-box tablets are no longer reserved solely for the Chinese markets, they are gaining ground across the globe. In terms of form factors, 7-inchers still dominate the white box landscape. Although 8-inch tablets were expected to replace them, high costs and a limited supply of 8-inch panels limited shipments and drove costs up. However, this should change next year. Most white-box tablets are powered by Mediatek chips, although there are quite a few models powered by Rockchip and Allwinner parts. Mediatek still appears to be gaining market share.

So where is the demand coming from?

Emerging markets are scooping them up by the millions, but white-box tablets are also showing up in Europe and North America. They are often sold in bundle deals or given away in promotions. As gifts or toys for kids they make a lot of sense. Retail chains can also buy cheap tablets and slap their sticker on them, opening up new markets.

However, white-box outfits are facing an uphill struggle. Their margins are already very low and they are facing more pressure from brand name tablets. Many big companies are going cheap, with $149 or $99 tablets.